Retail Revolution in India: M&A's and Bracing for Foreign Investment

By Ritesh Gupta

The buzz around the topic of retail revolution in India continues to get stronger with every passing day.
Following Wal-Mart's joint venture with New Delhi-based Bharti Enterprises in late November, the local players, especially big conglomerates, have started to showcase their finance strength.

There are already signs of consolidation in this country primarily served by mom and pop operators, as the country's organized sector gears up to expand its share from mere three percent in 2006.

Technopak Advisors, a management consulting company specializing in consumer goods and retail sectors, expects retail sales to soar from US$300 billion in 2006 to US$427 by 2010 and $637 billion by 2015. The share of the organized sector is expected to grow from three percent in 2006 to 16 percent in 2011.

In the recent past, in the organized sector, the likes of Reliance Retail and the Aditya Birla Group have invested in Adani Retail Limited (ARL) and Trinethra Superretail Limited, respectively.

As far as foreign players are concerned, the current Indian law does not allow FDIs (foreign direct investment) in front-end retail and allows only 51 percent foreign investment in single-brand retail with prior government permission. Cash-and-carry is seen as an interesting business proposition for international retailers being that when the restrictions on the retail industry in India are lifted, international retailers will be in a prime position to easily convert their cash-and-carry stores into highly profitable supermarkets and hypermarkets.

Currently, the two most prominent players in the Indian cash-and-carry business include the German chain, Metro, and the African food retail chain, Shoprite.

Discussion Questions: What are the short and long term prospects for international retailers in India? What will be the role of domestic Indian chains as partners and competitors of global interests?

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has already suggested a cautious approach before the domestic retail sector is opened up for overseas investments in one go. The ASSOCHAM has opposed 100 percent foreign equity in the first instance, arguing that the domestic industry needs a minimum of three years for its consolidation before being prepared to take on global competition.

The ASSOCHAM reminded the government of the example of China, which opened up its retail sector to FDI only after the domestic organized retail industry was large enough to face competition from the foreign players.

Besides, the domestic players suffer from lack of infrastructure - the biggest bottleneck being the prohibitive prices of large retail spaces in the upmarket or central locations in the large Indian cities.

The analysts feel, as in case of Wal-Mart and Bharti JV, in which Bharti will be Wal-Mart's franchisee and wholly own the front-end system, the Indian franchisee knows the Indian landscape and understands the demographics in this country and also where to get the real estate for the business. It has domain knowledge about the country and thus franchising is an attractive option for the foreign players.

When it comes to consumers, analysts feel the familiarity to shopping through large stores is already there. For foreign players, the JVs with Indian partners will make the cultural transition easy.